A Random Walk Down Wall Street example

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A Random Walk Down Wall Street

A Random Walk down Wall Street is a unique book. It was first published in 1983, when trades involved calling a broker who then placed trade at commission fees, and is still very popular in 2015, when the concept of trading changed dramatically and relies mainly on e-trade. The enduring popularity of Malkeil’s book is attributed to the fact that it offers an in-depth analysis of technical trades, and cites a number of good reasons why the strategy is “usually amusing, often comforting, but of no real value” (Malkiel 163).In Chapter 6, Technical and Fundamental Analysis, Malkiel introduces technical trade as a strategy that is opposite to fundamental trade. In order to explain why the latter is more feasible than the former Malkeil offers insight into the essence of each strategy.

Fundamental analysis relies on the tenets of the firm foundation to select individual stocks. In turn, technical analysis involves making and interpreting stock charts. The main assumption underlying technical analysis is that if the price of the stock rose yesterday, it is likely to rise the next day. Malkiel resorts to a very good comparison to show the difference between the two strategies. Unlike fundamental analysts, who suggest that the market is developing according to the laws of logic, technical analysts believe that it is only 10 per cent logical, while the remaining 90 per cent are pure psychology. For Malkiel, such approach to the market development is absolutely unjustified, and he confidently asserts that, “stock price changes have no memory – the past history of the series cannot be used to predict the future in any meaningful way. The future path of the price level of a security is no more predictable than the path of a series of cumulated numbers” (56). While pointing to the inconsistency of technical analysis, Malkiel though acknowledges the fact that it has become the most popular analytical strategy.

For the expert, there is no paradox, and he offers at least two satisfactory explanations. Since technical analysis is a 90 per cent psychological, it is logical that Malkiel suggests the instinct of mass psychology as an evident reason for the popularity of the strategy. Most investors seeing the prices of a speculative favorite going higher and higher would want to join this rise. Another reason suggested by Malkiel is that the access to information about the company, so important to make accurate predictions, is usually unequally distributed. In conditions of limited information, insiders start buying a stock, if they have some favorable news. The price starts rising, and the big institutions put blocks of the shares in their portfolios (Malkiel 2015). At last, the information comes to outsiders that facilitate gradual increase or decrease in the price of the stock.It is interesting to note that the latter reason for technical analysis’ being popular may also result in its fail.

Chartists come into play only after stock price has been already established. …

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